On Friday, the City of Detroit announced settlements with a group of unsecured bondholders and the city's largest union, AFSCME. / File photo by Romain Blanquart/Detroit Free Press

Written by

Matt Helms and Nathan Bomey

Detroit Free Press Staff Writer

Detroit announced settlements Friday with the city’s largest union and a group of holdout unsecured bondholders —moves that put the Motor City a step closer to exiting bankruptcy and may encourage more workers and retirees to approve the city’s grand bargain aimed at reducing pension cuts and rescuing the Detroit Institute of Arts.

Mediators announced Friday that the city has completed a series of tentative agreements with the American Federation of State, County and Municipal Employees (AFSCME) Council 25, laying the groundwork for new collective bargaining for almost all city workers the union represents.

AFSCME’s leadership also agreed to urge all active and retired city workers to vote to approve the grand bargain, in which the city-owned DIA would be spun off to a nonprofit trust for the equivalent of $816 million from wealthy foundations, the State of Michigan and the museum itself, with proceeds going directly to reduce pension cuts.

AFSCME officials couldn’t be reached for comment, but in a statement released by mediators, Council 25 President Al Garrett said: “We remain severely concerned with the way this bankruptcy has been handled from its inception. However, the agreements we have achieved are, in our view, the best path forward for city employees and retirees. They simply cannot risk the further serious reductions in pension, pay and job security if the plan, and our collective bargaining agreements, are not approved.”

Terms of the union agreements weren’t released Friday. Mediators said the contracts would be presented to unionized workers ahead of ratification votes, and they’ll be released publicly once they’re ratified and approved by the state, which is expected by June 30.

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Terms of the bondholder deal weren’t released, with mediators saying details “are in the final documentation process” and that the creditors are companies that either hold or insure a large majority of LTGO bonds. That class of bond represents about $160 million of the city’s nearly $2 billion in unsecured debts and liabilities, not including pensions and health care benefits.

Taken together, the agreement with a major union and the settlement of a significant amount of unsecured debt strengthen the city’s position as it heads into weeks of hearings in federal bankruptcy court on confirmation of its strategy for exiting bankruptcy, called the plan of adjustment. U.S. Bankruptcy Judge Steven Rhodes this week rescheduled the hearings to begin Aug. 14 and span 28 days through Sept. 23.

The companies involved in the settlement included bond insurer Ambac Assurance and is believed to include Black Rock Financial Management. Both insurers were ordered into mediation talks this week by Chief U.S. District Judge Gerald Rosen, whom Rhodes appointed to lead mediation efforts in the nation’s largest-ever municipal bankruptcy.

“The settlement was reached after intensive negotiations spanning more than six months, sessions in which the parties’ interests were fully and vigorously represented and all issues robustly negotiated,” the mediators said in a statement released this afternoon.

While declining to reveal details, the mediators nonetheless hailed the settlement as a major step in “reaching a resolution that reflects not only a fair settlement for the parties, but will also expedite and facilitate the city’s exit from bankruptcy.”

“With this settlement,” the mediators added, “only a few remaining, albeit significant, disputes remained to be addressed between the city and its creditors prior to the bankruptcy court’s scheduled hearing on the city’s plan of adjustment.”

A spokeswoman for Ambac Assurance confirmed that the insurer, which backs $92.7 million in Detroit’s LTGO bonds, has agreed to a deal.

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“Given Detroit’s unique circumstances, Ambac has accepted a settlement with the city for the limited tax general obligation bonds,” Ambac’s Abbe Goldstein said in an e-mail. “We expect to continue to pay claims of scheduled principal and interest on the bonds insured by Ambac.”

Lawyers for Black Rock either couldn’t be reached immediately this afternoon or declined comment. An attorney for Syncora also couldn’t be reached; that company is a bond insurer that has been the most outspoken opponent of the city and its grand bargain, the deal in which the state government, wealthy foundations and the Detroit Institute of Arts have pledged the equivalent of $816 million in a deal to spare the museum from asset sales and reduce cuts for pensioners.

The city issued the $160 million in limited-tax general obligation bonds to pay for various community improvement projects. Detroit emergency manager Kevyn Orr’s latest public offer to the LTGO bondholders was 10 cents to 13 cents on the dollar.

Unsecured bondholders have been upset at Orr’s proposed treatment of their debt, arguing their bonds enjoy special protections that other unsecured debt does not.

A month ago, Black Rock bond executive Peter Hayes wrote that Orr’s plan “could engender a distrust of a popular and necessary form of financing.”

He added: “Municipalities, unable to afford the borrowing costs, could struggle to support their systems and provide services, and could turn to more speculative sources of financing, increasing the risk of more costly bankruptcies. Market distrust of Michigan LTGO debt is an outcome that would not only hurt bondholders — it could harm residents.”

The settlement is not believed to include bond insurer Syncora, which has aggressively fought Detroit’s bankruptcy and insured a smaller portion of the LTGO bonds. But if Ambac and Black Rock hold most of the claims, the settlement gives the city additional momentum in its bid to exit Chapter 9 bankruptcy by this fall.

The deal comes several weeks after unlimited-tax general obligation bonds — a form of debt with greater legal protections — settled for 74 cents on the dollar, allowing the city to divert the rest to poor pensioners.